Thursday, February 26, 2009

I think it's safe to say that everyone is wondering exactly when the hundreds billions that we have given to the banks on Wall Street, and the hundreds of billions more that the Obama administration is proposing to give them, is going to turn these banks around and restore the greatly damaged market for credit in the U.S. Chairmen of the Fed Ben Bernanke defended the administration's present plan, but the Paul Krugman joins the critics that are out in force:

Ben Bernanke’s testimony over the past two days gives us our best clue yet about where the administration and the Fed are going with bank rescue. And the answer seems to be … nowhere.

This is another sign of the serious brainpower that has been expended on finding ways to avoid or minimise government ownership of banks, and to avoid the slightest possibility of offending shareholders – shareholders whose shares have positive value primarily because of the expectation of a further government bail-out.

At this stage, I joked, I’d be just as happy with them just saying, “We have a strategy, we will continue to inject capital to prop up zombie banks indefinitely. That’s pretty much the whole plan and we’re counting on it bringing the financial sector back to life someday, somehow”. Is it just me or is that pretty much what Ben Bernanke said yesterday?

Yesterday afternoon I spoke to a senior Democratic aide in the Senate who repeatedly emphasized that, the way things stand now, it would be almost impossible to get another cent for the banks. Congress has “bailout fatigue,” the aide said.

Indeed. As long as capital injections are seen as a way to bail out the people who got us into this mess (which they are as long as the banks haven’t been put into receivership), the political system won’t, repeat, won’t be willing to come up with enough money to make the system healthy again. At most we’ll get a slow intravenous drip that’s enough to keep the banks shambling along.

Is nationalization inevitable? Nate Silver makes a plausible argument that there are many good reasons not to rush this approach, but if it's political pressure that Obama is waiting for, I'd say the tide is turning that way.